No-Load Funds in 2 Camps: Supermarket vs. Proprietary

The no-load mutual fund business is rapidly being divided into companies that can offer thousands of outside funds and those that offer only their own funds.

While larger fund companies have been able to shell out big bucks to form mutual fund "supermarkets," smaller companies may lack the resources to follow this lead, industry watchers said.

Fidelity Investments is the fund company best known for selling competitors' products, through its FundsNetwork supermarket. But over the past two years, rivals like American Century Investments, Vanguard Group, T. Rowe Price Associates, Dreyfus Corp., and Scudder Funds have quietly rolled out their own supermarkets.

They are doing so in hope of keeping their investors from using supermarkets offered by brokerage firms like Charles Schwab & Co., which pioneered the concept a decade ago, Jack White & Co., and Merrill Lynch & Co.

"The customer wants a full set of financial services, and if we don't offer that, they're going to go someplace else," said Kevin Cuccias, president of American Century Brokerage, which opened in January and offers almost 7,000 funds.

Fund companies increasingly want to capture the primary-client relationship. In other words, they want investors to go through them no matter whose funds they buy.

Firms that lose control of client relationships risk losing the clients' assets as well, said Burton Greenwald, a mutual fund consultant in Philadelphia.

"The Schwab approach of gathering assets is going to be, in the long term, the surest way to maintain client relationships," Mr. Greenwald said.

Or, in the words of Charles Roame, a former Schwab executive who is now a managing principal at Tiburon Group, Belvedere, Calif.: "You've got to have choice to win the consumer dollar today."

Smaller fund companies will be hard-pressed to follow their bigger counterparts into the world of supermarkets because the annual cost of running them can stretch into six or seven figures.

Even so, Babson, which has $4.7 billion of assets under management, is considering starting a supermarket, he said. Pete Greenley, a spokesman for Montgomery Asset Management, a San Francisco firm that manages $10 billion of assets, said the company does not plan to build a supermarket, in part because of the cost.

"The largest players are going to have an advantage," he said.

An executive at the Chicago-based Acorn Family of Funds, which manages $7 billion, called the challenge from fund supermarkets "an important business issue we're examining now for the future of our firm." She refused to elaborate.

But chances are that more big fund companies will roll out fund supermarkets and their smaller rivals will be unable to follow, said Tom Tyson, a senior analyst at Financial Research Corp., Boston.

"The larger groups have the scale to do it, and some of the smaller groups sell mostly through Schwab anyway," he said.

John Kornitzer, chief executive officer of Kornitzer Capital Management, Kansas City, Kan., acknowledged that the fund companies with supermarkets may grab some of his company's client relationships.

But the company, which manages $210 million of mutual funds, will get its share of clients by offering low fees and high quality, Mr. Kornitzer said. Investors calling for information frequently find the phones answered by company managers.

"It's always like David fighting Goliath," he said. "But if you build a quality product with quality service, over a long period of time you'll get your share of business."

Meanwhile, Neuberger & Berman Mutual Funds, a $60 billion fund company in New York, plans to start an asset allocation service in November that would incorporate a supermarket, said president Stanley Egener.

Not all the big fund companies plan to jump on the supermarket bandwagon, however.

"To my knowledge, it's not even something we've considered," said Lorrie Grove, a spokeswoman for Janus, a $90 billion-asset fund company in Denver. "We prefer to stick with what we do best, which is managing money."